What is the EAFE Index?
The EAFE Index (Europe, Australasia, and the Far East) was created to measure the performance of the stock markets in developed markets – excluding the U.S. and Canada. The indicator is maintained by MSCI Inc. and is popularly known as the MSCI EAFE Index.
MSCI Inc. is a U.S.-based finance company that provides analysis tools for equity, multi-asset portfolio, hedge fund stock market indices, and fixed income securities or instruments on a global level. Also known as Morgan Stanley Capital International Inc., MSCI Inc. is headquartered in New York City.
- The EAFE Index (Europe, Australasia, and the Far East) was created to measure the performance of the stock markets in developed markets, excluding the U.S. and Canada.
- The indicator is maintained by MSCI Inc. and is popularly known as the MSCI EAFE Index.
- MSCI Inc. is a U.S.-based finance company that provides analysis tools for equity, multi-asset portfolio, hedge fund stock market indices, and fixed income securities or instruments on a global level.
- The EAFE Index is used as a performance benchmark for developed equity markets, including Europe, Australasia, and the Far East.
Uses of the EAFE Index
The EAFE Index is used as a performance benchmark for developed equity markets, including Europe, Australasia, and the Far East. The EAFE index can be compared to the individual performances of funds to evaluate whether or not taking them on or adding them to a client’s portfolio would ensure good returns. The indicator helps portfolio managers determine whether a certain fund would be a good fit and will enhance the value to their client’s portfolio.
In investments, it is always advisable to keep a diversified portfolio. There may be investors who are seeking investments outside the Northern American region for their portfolios. The investors can include the stocks found on the EAFE by buying financial products linked to indexes. An example would be exchange-traded funds (ETFs).
Computed since 1969, the EAFE Index consists of carefully selected stocks from 21 advanced markets (excluding the U.S. and Canada).
The indicator is considered the oldest international stock index and is a popular tool for assessing foreign stocks. The MSCI EAFE stocks are weighted by market capitalization. It essentially means that bigger companies obtain a greater proportion of fund investment.
Benefits of the EAFE Index
1. Lower fees or costs
Similar to the S&P 500 Index, the EAFE reflects an actively controlled portfolio basket. Constructed around actively controlled indices, mutual funds and ETFs generally come with lower costs. It is because a portfolio or fund manager does not need to invest too much time and energy to constantly monitor the assets of the portfolio.
2. Lower volatility levels
The EAFE index is known to be less volatile in comparison to other multinational indexes, particularly those such as the MSCI BRIC, which monitors emerging economies. The EAFE is a comparatively less-volatile means of seeking out worldwide exposure.
3. Broadened diversification
The EAFE index enables investors to expand their portfolios fairly conveniently. Investors can reproduce the index in their portfolios independently or through effectively purchasing a mutual fund or ETF that emulates the index. Regardless of how the investor chooses to diversify his or her portfolio, he or she gains wide exposure to 21 foreign markets.
Drawbacks of the EAFE Index
1. Exclusion of several countries
Although the inclusion of 21 countries is wider when compared to other indices, several countries remain omitted from the EAFE. Several countries around the world, such as Russia, China, India, and Brazil, are categorized as very large and developed economies, but they are omitted from the EAFE Index.
2. Market-cap weighting distillates investments
Indexes are traditionally weighted by market capitalization; however, there are drawbacks to the approach. By incorporating most of the bigger countries, investments tend to be focused on only a couple of countries, such as the U.K. and Japan.
3. Possibly fewer growth opportunities
Although excluding developing markets and developing countries tends to make the indicator less volatile, it also indicates that there might be fewer prospects for growth. Developing nations enjoy a great deal of room and potential for growth, whereas developing economies have undergone cycles of fast growth already.
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